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Years ago there was a television commercial that offered consumers the opportunity to bring in their cars for maintenance so “we can fix it now,” or wait until their cars broke down and “we can fix it later.” The advertiser went to some lengths to point out that waiting to fix the problem later would definitely cost them more. While we’ve heard that advertising is mostly lies, this statement is pretty true. If you ignore the obvious issues and problems now, it will definitely cost you more to resolve them later.

Like all rules, there is an exception. Problems that get fixed later don’t cost you more if you can make sure it’s no longer your problem. For many years, this is one way the mortgage industry dealt with the problems that spring up with the loans we originate. If a correspondent lender originated a loan and was preparing to sell it off to an aggregator or conduit, it didn’t make a lot of sense to look too hard for problems. They would soon be the problems of the loan’s buyer. Eventually, the problem loan would be pooled with other loans, cut into tranches and sold off to investors.

This happened a lot during what some still refer to the as “the heady” days of mortgage banking, when the industry was originating NINA loans (no income, no asset) so quickly that nobody really had time to do much due diligence or check under the hood. Some problems took years to reveal themselves.

Those days are over, but some lenders are still operating under the old “fix it later” mentality. Take the correspondent lending business. The new QM loan quality initiatives regs have changed the rules so that no aggregator wants to inherent a loan that will cause problems down the road. It will either get kicked out of the pool of acceptable loans or sent back to the correspondent to perfect the file. Lenders buying loans from other institutions don’t have any choice, not with new rules from the CFPB and the FHFA/former GSE, which basically comprise the entire secondary market right now (we’re hoping that will change and as I write this I’m at the MBA Secondary Conference in New York. I’ll let you know what I learn).

The qualified mortgage rules are changing everything. Correspondent lenders are going to learn that fixing the problem after the loan has been originated costs significantly more than getting everything right (while they can still fix it) before the borrower signs the closing documents.

Correspondent lenders of any scale are going to have to employ automation to ensure compliance with every aspect of the investor’s requirements before the loan is closed. Such automation exists and can match up the new QM requirements with an automated compliance service to re-verify and validate closed loan data just before drawing docs to ensure the data and documents are as current, correct and compliant as possible. To ensure transparency, accuracy and compliance, this pre-close compliance check would be performed on 100% of the loan data and then pass the resulting audit along with the XML data and documents so correspondent investors will have something to compare the paper loan file to once it is closed. Again, this compliance eQC service already exists.

In the old world, if this kind of a check was performed at all, the lender would be forced to outsource to an imaging and OCR services company just to get some data and documents to compare against prior to funding. Today, it can be delivered in a direct, electronic fashion without any disruption to the lender’s workflow.

Even though this type of service constitutes a major pick-up both in terms of loan quality and compliance as well as serving as an excellent solution for improving the customer experience, some correspondents will still choose to “fix it later.” Investors are very serious about enforcing the QM rules and we expect them to be ruthless when it comes to demanding bank compliance. Those that wait until later to get the loan files right may well find that it’s too late by the time they try.

Comments (1)

Tim, You are so right. Unfortunately, these LQI rules don't go far enough which leaves us with the problems of internal process errors that make it appear that the loan is compliant, but when tested, the correspondent finds that the DTI, which was calculated by the lender at 42% was actually 45%. The automated QC has to go deeper into the process analysis and identify the risk associated with these types of errors. The MBA has come out with a position paper that supports just that. As you know I have been doing the work on just such as system for over 10 years now. The issue seems to be reluctance on the part of the agencies to let go of their outdated QC programs, and/or industry members reluctance/fear of trying something new. There are some lenders however, who really grasp the benefits of an eQC process. I think it would behoove the industry to listen to them.